What are Outsourcing and Offshore Outsourcing? Outsourcing –Arrangement in which one company...

What are Outsourcing and Offshore Outsourcing?

• Outsourcing – Arrangement in which one company contracts with

another organization to provide services that could be provided by company employees

• Offshore outsourcing– People doing the work are located in another country

• Responsibility for control of the outsourced business function or process – Shared between the firm contracting for services and

the outsourcing service provider

Information Technology for Managers 1

What are Outsourcing and Offshore Outsourcing? (continued)

• Large and small projects

• Information technology outsourcing (ITO)

• Business process outsourcing (BPO)

• Global service providers (GSP)– Use outsourcer’s best practices, business contacts,

capabilities, experience, intellectual property, global infrastructure, or geographic presence by tapping resources and providing capabilities anywhere around the globe

• More than 1000 outsourcing firms


3Information Technology for Managers

Why Do Organizations Outsource?

• Three of the most frequently cited reasons – Cut or stabilize costs– Improve the firm’s focus on core operations – Upgrade the firm’s capabilities and services


To Cut or Stabilize Costs

• Top reason to outsource

• Service providers typically have a lower cost structure due to greater economy of scale, specialization, or expertise

• Organizations that do not outsource probably have greater recruiting, training, research, development, marketing, and deployment expenses


To Improve Focus

• Enable an organization to focus on its most important priorities

• Ineffective to divert the time and energy of key company resources to do routine work that does not require their unique skills and intimate knowledge of the firm


To Upgrade Capabilities and Services

• Outsourcing provider– Highly efficient, with world-class capabilities – Has access to new technology, methods, and

expertise that would not be cost effective for its clients to acquire and maintain

• Many organizations have outsourced their logistics operations to third-party logistics providers to manage complex global supply chains


Issues Associated with Outsourcing

• Areas of risk include: – Quality problems– Exposure to legal liabilities– Negative impact on business partner and customer

relationships and satisfaction– Potential data and security breaches

• Information Week research survey: half of IT professionals rated their companies’ outsourcing efforts a success (see Table 4-2)


Quality Problems

• Significant risks that the service provider will create quality problems

• Example: RC2 – June 2007 recall for 1.5 million Thomas the Tank

wooden trains and related components that had been contaminated with lead paint

– Factory in Dongguan, China


Legal Issues

• Details of the outsourcing arrangement are documented in a formal contract

• Multiyear, multimillion-dollar deals that require approval by a board of directors

• Can generate expensive legal fees


Negative Impact on Customer Relationships and Satisfaction

• Reduces the amount of direct communication between a company and its customers– Prevents a company from building solid relationships

with its customers– Leads to dissatisfaction on one or both sides

• Dell decided to stop routing U.S. technical support calls to a call center in Bangalore, India


Data Security and Integrity Issues

• State of Florida – Contracted work on its payroll and human resources

system to Convergys, a U.S.-based outsourcing service

– Convergys subcontracted work to index state personnel files to GDXdata, another U.S.-based firm

– GDXdata allegedly outsourced the indexing work to a firm in India

• Violation of the GDXdata contract with Convergys

– Employees had to be warned that their personal data might have been compromised


Special Issues Associated with Offshore Outsourcing

• Major differences between outsourcing and offshore outsourcing

• How to control and manage the work being performed when: – Outsourcing partner may not speak your language – Partner guided by different cultural values and

industry standards


Special Issues Associated with Offshore Outsourcing (continued)

• Other issues also are associated with offshore outsourcing– Cost advantage– Turnover– Intellectual property rights– Important technology issues


Planning an Effective Outsourcing Process

• Takes planning, knowledge, and skill to execute well

• Roughly 50 percent of outsourcing efforts are considered successful– Carefully planned and executed their outsourcing

efforts following a multistep process


Establishing a “Smart” Outsourcing Strategy

• Smart sourcing – Based on analyzing the work to be done– Determining the best way to do the work in the future

• Recognize that outsourcing is not just about lowering labor costs

• Requires an organization to work in a true partnership with the outsourcing provider


Evaluating and Selecting Appropriate Activities and Projects for Outsourcing• Shifting seriously flawed operations to a less

expensive organization does not solve fundamental problems

• Organization must carefully consider which process and projects it should assign for outsourcing

• Risk – Dealing with increased management complexity– Heightened as the organization increases the scope

of processes being outsourced


Evaluating and Selecting Appropriate Activities and Projects for Outsourcing

(continued)• Key questions to separate core business

processes from their less critical processes– How critical is the project or process to unique

strategic differentiation?– How competitive and innovative is the organization

in this business area?– How cost effective are activities in this business

area?– How much customer value does the project or

process provide?


Evaluating and Selecting Appropriate Activities and Projects for Outsourcing

(continued)• Start with a short-term, low-risk outsourcing pilot

effort

• At least six months are required to gain experience with the service provider

• Company may want to expand the scope of its outsourcing efforts– After initial experience


Evaluating and Selecting Appropriate Service Providers

• Organization should think in terms of hiring a partner– Not just a provider

• Choose firm with which they can build a strong strategic partnership – Based on a mutually sustained commitment to

achieve specific business goals

• Use due diligence– Research outsourcers through documents generated

as a result of the Sarbanes-Oxley Act


Evaluating and Selecting Appropriate Service Providers (continued)

• SAS 70 audit – Statement of Auditing Standards No. 70, Service

Organizations– Can help evaluate an outsourcing firm’s internal

controls– Failure to share the results of an SAS 70 audit

should be a warning signal in dealing with an outsourcing vendor


Evaluating Service Provider Locations

• Any outsourcing service provider can be affected by economic turmoil, natural disasters, and political disturbances– Potential for these risks is greater in some places

than others

• Ideally, provider should have several geographic locations


Evaluating Service Provider Locations (continued)

• Other factors– Availability and reliability of high-speed

communications networks and power grids– Availability of sufficiently trained workers– Effectiveness of the outsourcing firm’s national legal

system in protecting intellectual property, including copyrights, trade secrets, and patents


Benchmarking Existing Service Levels

• Organization should benchmark its existing service levels before signing outsourcing contract– Can establish a reasonable baseline for negotiating

target results and costs– Used to define the service-level agreement (SLA) of

the contract

• Choose the right measures to evaluate the performance of the process– You get what you measure


Developing an Outsourcing Contract

• Job for experienced procurement and legal professionals

• Ownership of assets and facilities– Firm can transfer ownership of the assets along with

operational responsibility to the outsourcing service provider

– Firm can transfer the assets to a third party (financial services firm) under some sort of leaseback arrangement

– Firm can retain ownership of the assets while the provider takes on the operational responsibility


Developing an Outsourcing Contract (continued)

• Current trend – Reduce the size and complexity of outsourcing

contracts

• Organizations are opting for simpler, more business-specific arrangements that employ multiple service providers– Not a foolproof approach to containing project costs

• Critical to determine what legal system and which country will have jurisdiction over any contract disputes


Establishing an Outsourcing Governance Process

• Formal and informal processes and rules – To manage the relationship between the two

organizations

• Defines procedures such as:– Periodic formal reviews– Explicit escalation procedures

• Requires dedicated, trained vendor relationship professionals– Excellent communication, problem solving, and

negotiation skills


Measuring and Evaluating Results

• Enable the firm to hold its outsourcing provider accountable for implementing corrective action as needed

• If the service provider’s performance and costs do not meet the SLA standards:– Financial penalties can be assessed and the

contract can even be terminated

• Ongoing tracking and measurement of important metrics enable the organization to use the data as feedback


A Manager Takes (the Wrong) Action: Swansea City Council Outsources IT

• 2004– Plans to launch an e-government initiative to enable

residents to conduct business with the council face to face, by phone, or over the Internet

– Enable 200 phone numbers to be replaced with a one-stop center and a single phone number

– Provide a set of improved Internet services

• Decided to outsource – Work of implementing the e-government initiative– Operation and support of the council’s IT services



(continued)• IT staff went on strike in August 2004

– 63 percent of the 5000 union members voted to strike against outsourcing

• Learned that the IT outsourcing project would cost £150 million over 10 years– Increase of nearly 50 percent over the original

estimate

• April 2005– Transfer 70 percent of the IT staff to Capgemini



(continued)

• Contract with Capgemini finally was signed in January 2006 – After a delay of 18 months

• January 2007– Swansea City Council cancelled the e-

government component of the outsourcing contract

– Slashed the contract value to £40 million


Summary

• Outsourcing – One company contracts with another organization to

provide services that could be provided by company employees

– Cut or stabilize costs– Improve the firm’s focus on its core operations– Upgrade the firm’s capabilities and services

• High-risk activity – Quality problems, exposure to legal liabilities,

negative impact on business partner and customer relationships, potential data and security breaches


Summary (continued)

• Process to successful outsourcing includes:– Establishing a smart outsourcing strategy– Evaluating and selecting appropriate activities and

projects for outsourcing– Evaluating and selecting appropriate service

providers– Evaluating service provider locations– Benchmarking existing service – Developing the outsourcing contract– Establishing an outsourcing governance process– Evaluating and measuring results


What are Outsourcing and Offshore Outsourcing? Outsourcing –Arrangement in which one company...

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